1984 (3) TMI 174 - AT - Income Tax

Summary

Issues Involved:
1. Whether the formation of a partnership and the transfer of assets from an individual to the firm constitutes a "transfer" under the Income-tax Act, 1961.
2. Whether the development rebate granted to the assessee should be withdrawn under section 155(5) of the Income-tax Act, 1961.
3. Jurisdiction of the Income Tax Officer (ITO) to proceed under section 155(5) in the context of debatable issues.

Issue-wise Detailed Analysis:

1. Whether the formation of a partnership and the transfer of assets from an individual to the firm constitutes a "transfer" under the Income-tax Act, 1961:

The Income Tax Officer (ITO) viewed the formation of the partnership as a transfer of machinery from the individual assessee to the firm, thereby invoking section 155(5) to withdraw the development rebate. The assessee argued that no transfer occurred, as he continued to show himself as the proprietor of the assets in his wealth-tax return, and the second partnership deed reserved the rights of the goodwill to him. The Tribunal examined the balance sheets and partnership deeds and found that the machinery was shown as an asset of the firm, and there was no reservation of rights over the machinery in favor of the assessee in the partnership deed dated 1-1-1978. The Tribunal concluded that the machinery ceased to belong to the assessee in his individual capacity and became the property of the firm from 1-1-1978. The Tribunal cited the Supreme Court case of Malabar Fisheries Co. v. CIT, which stated that, in the absence of a special agreement, all members of a partnership are interested in the whole of the partnership property. The Tribunal found no special agreement reserving rights over the machinery to the assessee, thus determining that a transfer had indeed occurred.

2. Whether the development rebate granted to the assessee should be withdrawn under section 155(5) of the Income-tax Act, 1961:

The Tribunal noted conflicting judicial opinions on whether pooling individual assets into a partnership constitutes a transfer for the purposes of withdrawing the development rebate. The Tribunal referred to various High Court decisions, including those of the Karnataka High Court in M.A.J. Vasanaik's case and the Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works, which supported the revenue's view. However, the Tribunal preferred the Madras High Court's view in Abdul Khader Motor & Lorry Service and Sree Kaliswari Colour Match Works, which found that such pooling did not constitute a transfer. The Tribunal reasoned that the extended definition of "transfer" in section 2(47) of the Act, which includes "relinquishment" and "extinguishment," applies only for capital gains purposes and not for the withdrawal of development rebate. The Tribunal concluded that the phrase "sold or otherwise transferred" in section 34(3)(b) should be interpreted narrowly, applying the principle of ejusdem generis, and found that the pooling of assets did not constitute a transfer. Consequently, the Tribunal held that the development rebate should not be withdrawn.

3. Jurisdiction of the Income Tax Officer (ITO) to proceed under section 155(5) in the context of debatable issues:

The Tribunal observed that section 155(5) is linked to section 154, which deals with rectifying mistakes apparent from the record. It cited the Tribunal's decision in T. Ch. V. Ramanaiah and T.B.V. Ramanaiah, which held that section 155(5) could not be invoked for debatable issues. The Tribunal found that the issue of whether the pooling of assets into a partnership constitutes a transfer was highly debatable and not self-evident or unambiguous. Therefore, the Tribunal concluded that the ITO lacked jurisdiction to proceed under section 155(5) in this case. However, since the assessee succeeded on the primary legal ground, the Tribunal did not need to decide this jurisdictional issue.

Conclusion:
The Tribunal dismissed the departmental appeals, holding that the formation of the partnership did not constitute a transfer for the purposes of withdrawing the development rebate and that the ITO lacked jurisdiction to proceed under section 155(5) for debatable issues.